Quote:
Originally Posted by nabishek
Dear wiseman,
Can you please guide us on how to manage cash better during these times?
Though my liquid/debt investments have been giving better returns than I would have got in any other assets, I have some very basic concerns during this period of uncertainity.Looks many here share the same concern too.
Let me try and explain.Deflation I feel doesnt always result in price coming down and better affordabality.Especially when it also results in shortage in supply/volume.It could result in people who have more wealth and money fight with each other for the limited resources pushing the price even higher.
In India, Business dont generally cater to the masses - i.e. low profit mass volume but its increasingly becoming high profit low volume.The corporates are not obliged to provide value for money and concentrate only where they can profit more.It has become only the responsibility of the government to announce freebies, provide subsidy, take care of have-nots.It works for the government/political parties as such announcement are populist and they also recieve kick-backs from corporates.
Ths issue now is, whether to choose the devil or the deep blue sea.I choose to believe the government as they are the known devil and think, thanks to their policy and past history we will become increasingly poor and keep expecting them to provide for us and we inturn vote for them.
Unless rupee appreciates considerably or governments policy shifts towards domestic production/consumption, I feel with global deflationary effect destroying value of money, It will not only ensure pressure on jobs and salary but also deprive the middle class from what they are able to afford currently.I am not talking about borrowed money, but what we can buy now using cash from hard-earned savings.
I have started to believe and prepare myself to face stagflation for India.I feel it is more or less the same preparing for deflation now and hyperinflation later, only difference I now carry my umbrella in case my house leaks eroding value of my cash and threaten to drench me and flood my livelihood.
Request you to kindly put things in perspective for me and advise.Thanks very much in advance.
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Hi Abishek,
I am prone to believing that progressively the world is getting from bad to worse in the economic sense. Please note that I said "world" and not "India". But what affects the world will also affect us since we are getting increasingly coupled into the world economy.
The core belief is that we will see a global depression of zero or low growth overall and negative GDP growth in many parts of the world for a few years from today. There will also be a massive destruction of "
credit" which happens to actually be "
debt" and is the root cause of the whole mess.
A recent statistical study shows that the worst case scenario will see around half the world's economies go into Sovereign Default (where the Govt itself defaults on repaying debt) and a ultimate loss estimated between $10 - 15 Trillion. But this is the worst case and maybe we will see something far less.
The takeaway is this.
The World will not end! Thats a relief!
But how you handle your job (income), your spending and your investment as well as the debt you take on can make a HUGE difference to your financials for decades to come.
This is how I'm approaching the next few years..
- Reduce all debts to ZERO! I started this in 2006 and went Zero in 2008.
- Do not leverage to buy any asset since most favored assets (land, stocks) will see significant declines in value (obviously this will be only for short periods of time in India, but in the US they could take several years to come back to where they were in 2007 or for that matter even today. Buy only for cash
- Reduce discretionary spending (postpone buying those fancy cars, high cost stereos, etc unless you are spending cash and that too after putting aside at least 1 years living expenses for emergency. This will be the toughest thing to do for our youngsters who started their careers running revolving credit on their cards by middle of the month
- Do not go into long-term debt. 1 year debt instruments (FDs, etc) are probably optimal as Interest rates will be very dynamic
- Put at least 15-20% of your longterm assets into investment (even at today's price). Foreign Coins (Krugerand, Sovereigns, etc are best). Also buy some silver
- When markets crash, load up on high dividend yielding stocks with good performance. In the last crash, one could easily pick up good companies with 8% - 12% dividend yield, which is phenmenal as a starting position. Remember that, today, these dividends are tax-free in your hands (which will change with the new tax code) and over the next 5-5 years these dividends will grow to give you a yield of 15% - 25% on your original investment.
Thats about it. On my part, I also put around 2-3% of my portfolio into highly leveraged speculation in Options which could yield (if you are lucky) returns in the 100s of percent. But this is not an easily available option (pun intended
) and I would not ask anyone to get into F&O as it is a most dangerous field.
Any other ideas rom others will be welcome as I can add to my tools for financial growth!
And most importantly, answering your question on stagflation. As money supply crashes (deflationary), credit will become very scarce and very costly (I believe it would easily surpass 90s interest rates of 15%-20% and we will see 20%+ interest rates). Couple this with even stagnating prices of assets along with stagnating incomes as salaries remain flat and real purchasing power of rupee declining and you are heading for some very hard times if you take on debt, especially very large debt (loans) in relation to your income and savings (assets). Remember that, until you pay off your last EMI the house belongs to the bank and in a stagnating price environment and low liquidity, distress sales will see you losing even your down payment if you are forced to sell within the first 5 years as interest takes up most of your EMIs.
Also relating to investing large parts of our savings in fixed income securities is (in my opinion) a losing proposition when you are simultaneously hit with dropping PP of Rupee, rising interest rates and a lagging return on investment on these securities (the interest you receive is always lower than the interest you pay on debt, that why I call it lagging). If you take a more dynamic interest in the stock market and look for crashing markets to throw up high dividend yields and get into sound stocks purely for dividend with price appreciation as an extra bonus, you will get returns north of 20% and even as high as 50% per annum in a flat market going nowhere. You might want to experiment with this as it has served me very well over the last 25 years!
But I suppose you know that already Abishek!
cheers